Insurance Policies Broadly Defining “Suits” May Prompt an Insurer’s Duty to Defend and Indemnify During the Chapter 558 Pre-Suit Notice Process

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, No. SC16-1420, 2017 WL 6379535 (Fla. Dec. 14, 2017), the Florida Supreme Court addressed whether the notice and repair process set forth in chapter 558, Florida Statutes, constitutes a “suit” within the meaning of a commercial liability policy issued by Crum & Forster Specialty Insurance Company (“C&F”) to Altman Contractors, Inc. (“Altman”). The Court found that because the chapter 558 pre-suit process is an “alternative dispute resolution proceeding” as included in the definition of “suit” in the policy by C&F to Altman, C&F had a duty to defend Altman during the chapter 558 process, prior to the filing of a formal lawsuit.

Chapter 558, titled “Construction Defects,” sets forth procedural requirements before a claimant may file a construction defect action. It requires a claimant to serve a written notice of claim on the applicable contractor, subcontractor, supplier, and/or design professional prior to filing a construction defect lawsuit. The legislature intended for Chapter 558 to be an alternative dispute resolution mechanism in certain construction defect matters allowing an opportunity to resolve the claim without further legal process.

Altman was a general contractor for the construction of a high-rise residential condominium in Broward County, Florida. C&F insured Altman for the project through seven consecutive one-year commercial general liability insurance policies (collectively, “policy”). The policy required C&F to defend Altman against any “suit.” The policy, in part, defined “suit” as a civil proceeding. The Court found that the pre-suit 558 process was not a civil proceeding because the recipient’s participation in the 558 process was not mandatory or adjudicative. However, in defining the term “suit,” the policy also included “[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.” The Court found that the plain meaning of the term, “alternative dispute resolution” means a procedure for settling a dispute by means other than litigation. Hence, it determined that the chapter 558 process is an alternative dispute resolution proceeding within the plain meaning of the policy term, falling within the definition of “suit,” and triggering C&F’s duty to defend Altman during the 558 process.

Depending on how broadly an insurance policy is worded, insurance companies may be required to defend and indemnify their insureds through the chapter 558 process, before any formal lawsuit has been filed. Although this is beneficial to contractors, subcontractors, suppliers, and design professionals, the insurance companies will be burdened with having to pay legal fees in defending these parties during this process. As Altman expands what is considered a “suit” to include the 558 process in some instances, insurance companies would be wise to analyze how they define “suit” in their policies going forward to avoid triggering a duty to defend and indemnify its insureds even before formal litigation has been initiated.

Nevada Non-Mutual Claim Preclusion Case Effect on Permissive Cross-Claims

In construction defect litigation, including matters where the contractors are covered by owner controlled insurance policies (“OCIP”) or design professionals are not sued by plaintiff, a question often arises as to whether or not the co-defendants should file cross-claims for indemnity or contribution regarding plaintiff’s defect and damage claims? Notwithstanding the permissive status of such potential cross-claims, the prudent course in Nevada construction defect cases — without a good reason to justify a second lawsuit — is to file cross-claims or third-party complaints regardless of OCIP potential coverage to avoid claim or non-mutual claim preclusion.

Procedurally, parties with permissive cross-claims in the past could wait before proceeding against co-defendants under statute and case law. In Nevada, the applicable rule on cross-claims against co-parties is NRCP 13(g). A pleading may state as a cross-claim any claim by one party against a co-party arising out of the transaction or occurrence that is the subject matter either of the original action or of a counterclaim therein or relating to any property that is the subject of the original action. Such cross-claim may include a claim that the party against whom it is asserted is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.

A frequently cited case interpreting the permissive cross-claim rule is Executive Mgmt. v. Ticor Title Ins. Co., 114 Nev. 823, 963 P.2d 465 (1998). Noting that NRCP 13 (g) language is “clearly permissive” regarding the option to pursue, the Nevada Supreme Court held that where a party to an action has a permissive cross-claim, that party has the option to pursue that claim in an independent action, and if such a claim is neither asserted nor litigated, the parties cannot be barred from asserting it in a later action by principles of res judicata, waiver or estoppel. 963 P.2d at 474. Moreover, the Supreme Court stated it would “not allow the doctrine of claim preclusion to convert the permissive character of NRCP 13(g) into a compulsory mandate.” Id. at 475.

However, the Nevada Supreme Court’s relatively recent decision in Weddell v. Sharp 131 Nev. Adv. Op. No. 28, 350 P.3d 80 (May 28, 2015), has limited that procedural option for co-defendants. Even as to parties without contractual privity, the Nevada Supreme Court held that non-mutual claim preclusion applies in Nevada. The purpose of claim preclusion and non-mutual claim preclusion is to obtain finality of litigation by preventing a party from filing another suit based upon the same set of facts present in the initial suit. This includes promoting judicial economy in situations where the rules of civil procedure governing noncompulsory joinder, permissive counterclaims, and permissive crossclaims “fall short.” 350 P.3d at 84.

In the Weddell case, the Supreme Court decision modified the privity requirement established in Five Star Capital Corp. V. Ruby, 124 Nev.1048 (2008), with application of “the doctrine of nonmutual claim preclusion.” In short, the Nevada Supreme Court Weddell decision makes it clear that the main inquiry focuses on whether appellant has shown a good reason to justify this second lawsuit. Weddell 350 P.3d at 85.

Now, notwithstanding the optional direction for permissive cross-claims or counter claims under NRCP (13), the Nevada Supreme Court found that defendants in a second lawsuit may validly use a claim preclusion defense based upon where (1) there has been a valid final judgment in a previous action; (2) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first action: and (3) privity exists between the new defendant and the previous defendant or the defendant can demonstrate that he or she should have been included as a defendant in the earlier suit and the plaintiff cannot provide a “good reason” for failing to include the new defendant in the previous action. 85-86.

Governor Scott Paves the Way for Greater Clarification as to when a Contract for the Design, Planning, or Construction of Real Property is “Completed” Under Florida’s Statute of Limitations for Construction Defect Litigation

On June 14, 2017, Governor Rick Scott signed off on House Bill 377, which modifies § 95.11(3)(c) and brings clarification to condominium associations, developers, contractors, and design professionals by specifying the date of “completion” of a contract for the designing, planning, or construction of an improvement to real property.

Section 95.11(3)(c), Florida Statutes, requires that the following actions be brought within four years:

An action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

95.11(3)(c), Fla. Stat. (2016). In Cypress Fairway Condo. v. Bergeron Constr. Co., 164 So.3d 706 (Fla. 5th DCA 2015), the Florida Fifth District Court of Appeal was presented with the issue of whether, for purposes of § 95.11(3)(c), the date of “completion . . . of the contract” for the the design, planning, or construction of an improvement to real property is the date upon which construction is completed, or, if it is when the contract is completed, which, in Cypress, was the date on which final payment was made. The Court held that a contract governed by the § 95.11(3)(c) ten-year statute of repose is completed when “final payment is made under the terms of the contract.”

In so ruling the Court explained: “Completion of the contract means completion of performance by both sides of the contract, not merely performance by the contractor. Had the legislature intended the statute to run from the time the contractor completed performance, it could have simply so stated.”

The Court’s interpretation that term “completion” in § 95.11(3)(c) means the date upon which final payment is made under the contract is that, even if construction has long been completed, so long as the required final payment has not been made, the statute of repose continues to be tolled. The practical consequence of such an interpretation may stretch so as to toll § 95.11(3)(c) long after construction is completed and enlarges the window of potential liability for a contract.

Of course, parties to a contract for the design, planning, or construction of an improvement to real property are free to expressly declare in the governing documents a completion date that will utilized to determine the time period within which a plaintiff bring an action for a construction defect. Notwithstanding that clear option, the Legislature obliged the Cypress court and has taken affirmative action to correct that problem by introduction of House Bill 377, which introduces the following tag-along clause to § 95.11(3)(c): “Completion of the contract means the later of the date of final performance of all the contracted services or the date that final payment for such services becomes due without regard to the date final payment is made.” Chapter 2017-101, House Bill No. 377.

Accordingly, contrary to the conclusion reached in Cyrpess, under § 95.11(3)(c), and unless contractually stated otherwise, the date of “completion” is the date upon which construction is completed. Although House Bill 377 provides greater clarity to contractors, it remains advisable to expressly indicate in the governing documents the final date of completion so as to avoid the possibility that a dispute will arise over when that precise date is. Indeed, in Cypress, the competing dates—one of which two dates would have foreclosed the plaintiff’s claim—for “completion” were a mere three days apart, demonstrating the importance of definitively establishing such parameters.

GRSM counsels clients in the areas of construction, design, and planning for public and private projects in various capacities in Florida and across the entire Country. Please contact us with any questions you might have concerning the manner in which this legislative change could impact your business.